Bridging the Gap: Identifying the Funding Gap for Impact Ventures

James Keck MBA ’24

TFC Social Innovation Strategy Chair 2023 – 2024Social Innovation Strategy Chair MBA '24


The funding-gap for impact startups is gating access to much-needed innovation. This Gap can be described as the dearth of private capital available to help impact companies discover product-market fit. This article will breakdown each point: understanding the Gap, private capital’s role, and product-market fit (PMF).

Brigit Helms of the Miller Center breaks the Gap down into 4 parts [1]: stage, instruments, market, and risk. I’ve linked her video below if you’re interested in her taxonomy. We’ll focus specifically on the stage component. There is a plethora of funding options for pre-product stage companies; there’s a wide array of options for post-PMF stage companies; there are very few options for post-product, pre-PMF stage companies. Here’s what I mean:

Pre-Product Stage

This is exactly what it sounds like, the early phase of a startup’s life cycle, typically before the development of a fully functional product. During this stage, the focus is on refining the business idea, conducting market research, and developing a prototype or minimum viable product (MVP). Funding at this stage often comes from the founders’ personal funds, friends, family, and possibly angel investors. In the impact space, funding frequently comes from grants and federal non-dilutive funding (NSF’s Seed Fund, MacArthur, Surdna, SBIR, NIH POCC, APEX Accelerators, etc).

Post-Product Market Fit (PMF) Stage

Post-PMF means you have strong data to support the idea that the product you’re actually selling is actively sought by your identified market. Founders often begin seeing a 3x-5x return on their marketing dollar at this stage. This is often the point at which a startup raising a Series A round. Traditional investment options are almost innumerable, including Sequoia, a16z, and BVP. Some impact-oriented investors at this stage can be found here and here for social ventures.

Pre-PMF Stage

Often, companies have an MVP built and are selling to some segment of the market prior to PMF. They’ve convinced individual buyers but they have yet to capture interest at any semblance of scale. Most often, the companies in this stage have yet to find consumers that really care. Many startups seek Seed stage funding to push through this round. However, in the impact ventures space, this is where the stage-based funding Gap most often exists. For one reason or another, private capital finds the risk adjusted returns unpalatable. Here are a few investors attempting to cover the Gap: Miller Center for Social EntrepreneurshipCalTech, and Vanderbilt.

Why does the gap exist?

There seems to be two key drivers: (1) impact ventures are complex and (2) on-target risk adjusted returns are easier to achieve if VC’s wait. In other words, many Limited Partners (LP’s) remain unwilling to sit on outstanding capital. As Esha Chhabra cites, “We see a funding gap for innovative solutions that don’t have a quick and clear path to huge scale and huge profits, especially in their early stages. Funders seem to want big results fast. What’s missing is a focus on how effective those results are in the long term and how deep that impact is. Many impact investors are measuring the financial results rigorously and the impact outcomes more anecdotally. We want to see funding looking for the biggest overall impact, with profitability being just one part of that.[2]” Esha shows that considerable work remains for investors looking to create an effective capital stack for enabling impact innovation.

What can be done?

We’ve noted that government has a meaningful role in pre-product funding. I believe educational institutions can carry the mantel for pre-PMF funding of impact ventures. As long as LP’s aren’t willing to expand investment-horizons on allocated capital, impact VC’s have their hands tied. This means educational institutions can affect change on two sides. First, educational endowments can include impact-orientation in their investment charters. Moreover, they can specifically designate a portion of capital allocated for over 5-year investment horizons. Second, institutions can form investment funds that are specifically designed to follow federal grant funding and bridge the innovation cycle between product realization and market realization.

In conclusion, the funding gap for impact startups, particularly in the crucial pre-Product Market Fit (PMF) stage, presents a significant barrier to the advancement of critical innovations. This gap is primarily driven by the complexity of impact ventures and the conservative risk appetite of traditional limited partners in venture capital. Government and educational institutions have pivotal roles to play in bridging this gap. Educational endowments, in particular, can actively contribute. By addressing these funding challenges, we can unlock the potential of impact startups, fostering sustainable and significant change in our societies and economies.